Amazon’s purchase of Whole Foods poses a monumental threat to regular grocery chains, whose shares were decimated Friday. Once completed, the deal will make Amazon a major physical retailer overnight. And that means Amazon will have breached the last line of effective defense protecting traditional chains like Target, Sears, and Gap in San Francisco from the online giant in Seattle.
Though brick-and-mortar chains have lost significant market share to Amazon over the years, they could take some comfort that people still like to visit stores. Online sales are growing at a double-digit rate every year, yet stores still capture most dollars. In 2015, by the most recent government data, e-commerce accounted for only 7.2 percent of all retail sales in the United States.
In other words, it only seems like everyone buys everything at Amazon. For all of the company’s power, there are limits to online shopping. With certain merchandise, consumers still want to experience the real thing and get in-person customer service.
Amazon was initially successful because “they could see that with some products, some categories, you don’t need physical stores,” said Nadia Shouraboura, a former top executive at Amazon who oversaw global supply chain and fulfillment.
But the company always knew that some categories — food, apparel and some electronics — required a real world presence, she said.
John McNellis of McNellis Partners, a real estate development firm in Palo Alto, said it was inevitable that Amazon would expand into brick and mortar for one reason: E-commerce generates little or no profit, he said. McNellis Partners specializes in malls and shopping centers.
And the company to blame for those economics is … Amazon. The retailer popularized free delivery, which forced competitors to match it. Now shoppers naturally expect the service at no charge. But getting a product from a warehouse to a home or business costs a lot of money, McNellis said.
“As long as there is free delivery, the e-commerce system is flawed,” McNellis said.
Indeed, the retailer turns out razor thin profits. Last year, Amazon generated only a $2.37 billion profit on sales of $136 billion, a margin of less than 2 percent,…